Five years later, WaMu’s collapse remains an outrage

A few days ago, newspapers and the blogosphere were full of stories about the fifth anniversary of Lehman Brothers’ collapse. The more significant date for Seattle is today, when federal regulators seized and closed Washington Mutual resulting in the biggest banking failure in American history. WaMu’s assets were sold to JPMorgan Chase and 9,200 jobs were cut, including 3,400 at the giant thrift’s downtown Seattle headquarters. Shareholders were pretty much wiped out. The city lost its standing as a major financial center, no small thing in a financialized economy. And the blast wave spread out into the firms that were WaMu vendors, civic assets supported by WaMu, and scores of downtown retailers that depended on business from the highly paid headquarters employees.

Naturally, the executives who wrecked this 119-year-old institution — which had survived the Great Depression and the savings-and-loan collapse — got away with it. Kerry Killinger, the chief executive who presided over the dangerous subprime calamity, and was compensated handsomely for it, is even turning up around town again. Wall Street, which encouraged WaMu to keep shoveling subprime loans that could be bundled into securities, is doing better than ever. Move along, nothing to see here.

But there is. No justice, no peace of mind.

There has never been a satisfactory explanation of the failure, even though Kirsten Grind’s The Lost Bank is must-reading for those who want to understand the management malpractice that led up to it. Even on its death bed, WaMu was mostly a healthy retail thrift with a huge branch network — this was what was coveted by JPMorgan’s Jamie Dimon. It was wounded by the subprime loans, many of them hustles made under questionable circumstances. But these alone shouldn’t have been fatal.

The Financial Crisis Inquiry Commissiondocumented some of the greed, fraud and toxic incentives that caused WaMu’s troubles, including the infamous no-documentation loans. But less attention has been paid to the time after WaMu secured a $7 billion lifeline in the spring of 2008 from David Bonderman’s Texas Pacific Group and other investors. Was this second chance too late or mismanaged away? The board which kept Killinger too long certainly bears some responsibility. Had the able Alan Fishman been brought in as CEO right then, instead of months later, a happier ending might have ensued. No investigation was made into the “whispering campaign” about WaMu’s soundness in New York that fall, which eventually resulted in a bank run. What else was at work in the deep state of financial powers?

WaMu lacked the friends in the other Washington that were essential to the survival of such disasters as Bank of America and Citi. It was not regulated by the influential Federal Reserve or the Comptroller of the Currency. That left Sheila Bair’s FDIC in the driver’s seat — and all she wanted was to protect the fund. The value of saving the good part of WaMu as a stand-along institution rather than allowing the Too Big to Fail to get bigger was never considered. Soon, “toxic assets” were taken off the books of banks by the Federal Reserve. Banks were allowed to essentially claim any value they chose for assets rather than having to mark them to market. Most important, only a few weeks after WaMu’s collapse, frightened regulators agreed to back all institutions.

Had that guarantee been in place this date five years ago, many of us would not still feel such loss, such outrage.

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